Basketball shoes sit toe to heel on the window ledge of Jon Epstein's office at Fila U.S.A. in Sparks, and portraits celebrate Fila-clad tennis stars and runners. But the more treacherous sport of mountain climbing dominates Epstein's thoughts as the new chief executive struggles to revive the athletic footwear and apparel company.
Epstein draws inspiration from the first climber to scale Mount Everest without bottled oxygen, Fila endorser Reinhold Messner, he wages an uphill fight of another sort -- restoring the faded luster of the once-shining Fila brand.
"People climb because the mountain is in front of them. I needed this kind of challenge," said Epstein, 43, who left rival Adidas America in June after two decades to come to the subsidiary of Italy's Fila Holdings SpA. "It's a great brand. It has tremendous potential, something to give to the world. I want to be one of the people who can help it become great again."
Epstein may be in for the rockiest climb of his life -- and of the company's, industry experts and analysts say.
"It's easy to slide down, but harder to get back up," said Mark A. Millman, president of Millman Search Group Inc., a Lutherville retail consulting firm. "They have really lost contact with the consumer over the last couple of years. He has a long road ahead of him to regain their position."
A Wall Street success story, Fila Holdings hit it big in the early-to-mid '90s, when its footwear and active apparel, which had been popular in the inner cities, quickly caught on in the suburbs.
Basketball shoes endorsed by Detroit Pistons star Grant Hill sold millions, driving sales from $349 million in 1992 to $1.5 billion last year -- with 45 percent generated by the U.S. division -- as quarterly earnings consistently beat analysts' expectations. Its American depositary shares rocketed, peaking at $105 in September 1996 on the New York Stock Exchange.
But starting late last year, the trends reversed, as consumer tastes shifted and competition intensified. Sales and earnings plunged, its shares took a nose dive and the jackets and running pants sporting the Fila brand name seemed to disappear from the streets.
This month, Fila Holdings SpA reported a second-quarter loss of $58 million, or $2.19 per American depositary share, reversing a second-quarter 1996 profit of 56 cents per share. U.S. footwear sales plunged 56 percent, to $59 million, and U.S. apparel sales fell 39 percent, to $22.7 million, for the quarter. Fila's shares have plummeted nearly 90 percent from their high, closing at $8.75 Friday. In 1997, with branded athletic footwear sales of $488 million, Fila lost its third-place market share ranking, behind Nike and Reebok, to Adidas.
Epstein watched it all as a competitor, for the past four years as Adidas' national sales manager based in Portland, Ore. Now, just two months into his new job, Epstein looks to Messner's against-the-odds Everest climb and says he can lead the company out of its steep decline, overcoming fickle consumer tastes, the rising popularity of the hybrid outdoor-style, yet athletic brown shoes, an overall slowdown in sales growth of athletic footwear and growing competition from non-athletic designers.
The key, he says, is capitalizing on the Italian heritage of the company to make it the Ferrari of the sneaker industry, an elite brand that looks good and performs well. The brand, he says, should be endorsed by the most elite athletes, with a focus on the international arena and sports such as basketball, running, tennis, training and soccer, and with products sold almost exclusively in athletic specialty stores.
Analysts say Fila's recovery depends upon Epstein's ability to regain the confidence of retailers, rebuild the brand with consumers, improve the company's cost structure and, perhaps most importantly, create new and better product design.
Initial moves
In his first few weeks, Epstein has already spearheaded the design of a new basketball shoe, a slimmer version of the chunky shoes he says have fallen out of favor with youngsters. He is also working to reduce inventory and expenses. Cost-cutting measures will likely include seeking licensees for products such as in-line skates and baseball gloves and outsourcing distribution, which would mean shutting down or consolidating company-leased distribution centers.
Two warehouses in the Baltimore area that employ 209 Fila and contract workers could be among those turned over to a contractor, paid on a per-unit basis. However, an outside distributor would likely hire those employees and possibly more, Epstein said.
Prior to his arrival, the company had announced cutbacks of 265 jobs nationwide, including 26 layoffs last week, some at the Baltimore warehouse and the Sparks headquarters, which employs 217. The company had also previously planned to close retail shops in New York, San Francisco, Chicago, Costa Mesa, Calif., and Short Hills, N.J.
"We're encouraged by what Jon is doing and the direction and strategy he is taking," said Sima Nag, an analyst with Merrill Lynch Global Securities in New York, who projects a range in earnings for 1999 from break-even to a loss of 50 cents per share. "But we're kind of waiting to see what happens, given the state of the industry."
Bob Carr, editor of New York-based newsletter SGB's Inside Sporting Goods, who has tracked the industry for nearly three decades, calls Epstein's ambitions "noble."
"But it's very, very tough at this point," Carr said. "He's got his hands full. Jon knows how to sell, and people like him. The question is, is the demand there for the product?"
In releasing second-quarter earnings, Enrico Frachey, chief executive officer of the Biella, Italy-based Fila Holdings, blamed the company's troubles on both the currency devaluations and spending contraction in Korea and the rest of the Far East as well as a fashion shift in the United States to "brown" shoes -- hiking boots and trail shoes -- for casual use.
Changing consumer tastes, especially among youth, is an industry hazard.
Drop in demand
"The unfortunate problem with the American consumer is that we're very fickle. It's hard to hold our interest," said Robert McMath, a new product development consultant and president of the New Products Showcase and Learning Center in Ithaca, N.Y. "For the young people who get these things because it's hot today, and they're buying it, doesn't mean that two more sneaker sizes up they will continue to buy if you haven't changed it."
The slowdown in demand is hurting the entire $12.5 billion athletic shoe industry, including industry leaders Nike and Reebok, with market shares of 47.03 percent and 15.22 percent respectively in 1997, according to industry newsletter Sporting Goods Intelligence.
"Seven or eight years ago, almost everyone was growing and showing gains," said John Horan, publisher of Sporting Goods Intelligence. "That's not the case anymore."
For Epstein, the question is less about demand than about the product itself. He concedes that competition is more intense than ever.
"The pie is smaller, but it still doesn't mean that every kid in America doesn't buy athletic shoes," he said. "Kids aren't going elsewhere because they don't like athletic shoes. They go elsewhere because we haven't given them a reason to stay with us. Sometimes a company gets trapped in doing the same thing they've always done because they've always done it that way. What kids respond to and consumers like is change."
Adidas background
Problems at Fila have closely mirrored the problems at Adidas, where Epstein started out of college as a sales rep in three states and learned the industry, as he puts it, "from the inside of a windshield."
Adidas, like Fila, had lost its focus on its original core value as a performance athletic footwear company, he says. But Adidas slowly regained market share by refocusing and improving quality and product delivery. Fila can recover in much the same way, he said.
"I competed against Fila when it was great," Epstein said. "I knew what was making it work. I also saw them lose their way, and the mistakes being made.
"The Fila name had value. The products were creative, stylish. They felt great, looked great and worked," he said. "[Then] the company started to trade more on the name that had been built than on the actual product, and the product was compromised. The leathers were wrong. The compositions were wrong. It became too mainstream."
His influence began on his first day at the company, when he studied a wall of Fila shoe styles. Right away he spotted strengths and weaknesses.
"After 20 years of being in this business, when it becomes so much of your life, you know what the customer wants and know what the customer demands," he said. "I could see the holes and see the problems and say 'this is right, this is wrong. I can tell you right now what we need to do.' "
Within two weeks, Epstein brushed off the original Grant Hill shoe and thought about ways to redesign it. (Fila renewed its endorsement contract with Hill last fall, signing him to a seven-year, $80 million deal.) Epstein came up with the idea of capitalizing on the original shoe's popularity by designing an updated version.
In less than two months, he had prototype Grant Hill Renaissance shoes completed, with innovations such as college basketball colors like Carolina Blue and Syracuse Orange and a low-cut style. He intends to time the launch of the new shoe, which is expected to sell for $85, to the March Madness NCAA basketball tournament next year. That shoe will likely be the highest-priced for the company, which plans to keep its prices in the $65 to $80 range -- considerably less than some earlier models -- as a way to win consumers over.
"We realized that one of the reasons kids are buying running shoes and not basketball shoes is the shoes are a little too chunky, a little too boxy," Epstein said. "It's not that kids don't want to wear basketball shoes. We have to change the recipe a bit."
In another project, he assigned teams of company designers a facility in Portland to come up with new designs for "slides," sandals that had been big sellers for Fila in the past.
The project showed him, "there are really creative people in the company, and they're looking for direction. I've never seen the creative juices flow like that at Fila; there must have been 60 drawings of slides on the wall, one more creative than the next."
Talking to retailers
Next, he said, he will take such ideas to big retailers and ask for input.
Rebuilding relationships with retailers could prove one of Epstein's toughest challenges.
"They may have to give up better terms and better pricing, which would be an incentive for retailers to carry the product again," Millman said. "No retailer wants to get stuck with product."
The co-owner of Athletic USA, a specialty athletic footwear and apparel chain in Baltimore and Washington, said he would be open to looking at new Fila designs, even though the chain has carried no Fila products and has had few requests for the brand for two years.
"They were a style-maker and they lost touch with what was happening in the industry," said Brian McAbee, co-owner of the chain, which has two stores in Baltimore. "A lot generates from the inner city and goes out to the suburbs. When you lose your niche in the inner city, you've lost it."
Epstein says he is unsure how long a turnaround will take.
"My goal is to make it profitable," he said. "We want it to pay off for investors, who have been on a roller coaster with the stock. I hope investors look at it as a global company with global reach. We have achieved a high level, and we can achieve it again, but the next time we get there, it will be built on a rock-solid foundation."
! Pub Date: 8/30/98